**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-Q**

 

**QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended June 30, 2004**

 

**Commission File No. 1-13453**

 

**TODHUNTER INTERNATIONAL, INC.**

(Exactname of registrant as specified in its charter)

 

| **DELAWARE**                                                     |   | **59-1284057**                   |
|------------------------------------------------------------------|--------|----------------------------------|
| (State  or other jurisdiction of  incorporation or organization) |   | IRS  Employer Identification No. |
|                                                             |   |                             |
| **222 Lakeview Avenue, Suite 1500, West Palm Beach, FL**         |   | **33401**                        |
| (Address  of principal executive offices)                        |   | (Zip  Code)                      |

 

Registrant’s telephonenumber, including area code:  **(561) 655-8977**

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months, and (2) has been subject to such filing requirements forthe past 90 days.

 

Yes ý                  No o

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act).

 

Yes o                  No ý

 

The number of sharesoutstanding of registrant’s Common Stock, $.01 par value per share, as ofAugust 12, 2004 was 6,338,519.

 

 

----

 

TODHUNTER INTERNATIONAL, INC.

 

INDEX

 
| PART I  | FINANCIAL INFORMATION |                                                                                                     |
|---------|-----------------------|----------------------------------------------------------------------------------------------------------|
|    |                  |                                                                                                     |   |
|    | Item 1                | Financial Statements                                                                                     |   |
|    |                  |                                                                                                     |   |
|    |                  | Consolidated Balance Sheets  -  June 30, 2004, unaudited and September 30, 2003                |   |
|    |                  |                                                                                                     |   |
|    |                  | Consolidated  Statements of Income -  Nine and Three Months Ended June 30, 2004 and 2003, unaudited |   |
|    |                  |                                                                                                     |   |
|    |                  | Consolidated  Statements of Cash Flows -  Nine Months Ended June 30, 2004 and 2003, unaudited       |   |
|    |                  |                                                                                                     |   |
|    |                  | Notes to  Consolidated Financial Statements                                                              |   |
|    |                  |                                                                                                     |   |
|    | Item 2                | Management’s Discussion and Analysis of  Financial Condition and Results of Operations              |   |
|    |                  |                                                                                                     |   |
|    | Item 3                | Quantitative and Qualitative Disclosures About  Market Risk                                              |   |
|    |                  |                                                                                                     |   |
|    | Item 4                | Controls and Procedures                                                                                  |   |
|    |                  |                                                                                                     |   |
| PART II | OTHER INFORMATION     |                                                                                                     |
|    |                  |                                                                                                     |   |
|    | Item 1                | Legal Proceedings                                                                                        | * |
|    |                  |                                                                                                     |   |
|    | Item 2                | Changes in Securities, Use of Proceeds and  Issuer Purchase of Equity Securities                         |   |
|    |                  |                                                                                                     |   |
|    | Item 3                | Defaults Upon Senior  Securities                                                                         | * |
|    |                  |                                                                                                     |   |
|    | Item 4                | Submission of Matters to a  Vote of Security Holders                                                     | * |
|    |                  |                                                                                                     |   |
|    | Item 5                | Other Information                                                                                        | * |
|    |                  |                                                                                                     |   |
|    | Item 6                | Exhibits and Reports on Form 8-K                                                                         |   |
|    |                  |                                                                                                     |   |
|    | Signatures            |                                                                                                     |

 

----

* Item is omitted becauseanswer is negative or item is inapplicable.

 

----

 

**PART I****- FINANCIAL INFORMATION**

 

**Item 1.****   ****Financial Statements**

 

TODHUNTERINTERNATIONAL, INC.

# CONSOLIDATED BALANCE SHEETS

 
|                                                       |   | **June 30,  2004** |        | **September 30,  2003** |   |
|------------------------------------------------------------|--------|-------------------------|-------------|------------------------------|--------|
|                                                       |   | **(Unaudited)**         |        | *****                        |   |
| ASSETS                                                     |   |                    |        |                         |   |
|                                                       |   |                    |        |                         |   |
| CURRENT ASSETS                                             |   |                    |        |                         |   |
| Cash and cash equivalents                                  |   | $                       | 2,148,713   |                         | $      | 14,918,605 |   |
| Short-term investments                                     |   | 215,415                 |        | 1,819,016                    |   |
| Trade receivables                                          |   | 16,303,998              |        | 15,867,079                   |   |
| Other receivables                                          |   | 1,369,861               |        | 2,879,334                    |   |
| Inventories                                                |   | 31,651,439              |        | 28,664,895                   |   |
| Notes receivable, current maturities                       |   | 662,304                 |        | 647,782                      |   |
| Deferred income taxes                                      |   | 1,444,000               |        | 2,224,000                    |   |
| Other current assets                                       |   | 5,406,666               |        | 3,895,977                    |   |
| Total current assets                                       |   | 59,202,396              |        | 70,916,688                   |   |
|                                                       |   |                    |        |                         |   |
| LONG-TERM INVESTMENTS AND NOTES RECEIVABLE                 |   |                    |        |                         |   |
| Investments in and advances to equity investees            |   | 2,305,616               |        | 1,879,623                    |   |
| Notes receivable from affiliates, less current  maturities |   | 3,684,015               |        | 3,714,346                    |   |
| Notes receivable, less current maturities                  |   | 435,522                 |        | 506,422                      |   |
|                                                       |   | 6,425,153               |        | 6,100,391                    |   |
|                                                       |   |                    |        |                         |   |
| PROPERTY AND EQUIPMENT                                     |   | 95,523,528              |        | 92,182,294                   |   |
| Less accumulated depreciation                              |   | 55,712,025              |        | 52,125,682                   |   |
|                                                       |   | 39,811,503              |        | 40,056,612                   |   |
|                                                       |   |                    |        |                         |   |
| GOODWILL                                                   |   | 20,524,404              |        | 20,524,404                   |   |
| AMORTIZED INTANGIBLE ASSETS                                |   | 804,697                 |        | 834,850                      |   |
| OTHER ASSETS                                               |   | 1,221,290               |        | 866,128                      |   |
|                                                       |   | $                       | 127,989,443 |                         | $      | 139,299,073 |   |

 

----

*From audited financial statements.

See Notes to ConsolidatedFinancial Statements.

 

1

----

 
|                                                                                                                                                             |   | **June 30,  2004** |        | **September 30,  2003** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-------------------------|-------------|------------------------------|--------|
|                                                                                                                                                             |   | **(Unaudited)**         |        | *****                        |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                        |   |                    |        |                         |   |
|                                                                                                                                                             |   |                    |        |                         |   |
| CURRENT LIABILITIES                                                                                                                                              |   |                    |        |                         |   |
| Current maturities of long-term debt                                                                                                                             |   | $                       | 4,000,000   |                         | $      | 4,000,000 |   |
| Accounts payable                                                                                                                                                 |   | 8,145,365               |        | 6,288,431                    |   |
| Accrued expenses                                                                                                                                                 |   | 1,480,743               |        | 3,837,745                    |   |
| Total current liabilities                                                                                                                                        |   | 13,626,108              |        | 14,126,176                   |   |
|                                                                                                                                                             |   |                    |        |                         |   |
| LONG-TERM DEBT, less current maturities                                                                                                                          |   | 25,463,312              |        | 47,315,617                   |   |
|                                                                                                                                                             |   |                    |        |                         |   |
| DEFERRED INCOME TAXES                                                                                                                                            |   | 5,334,500               |        | 5,243,000                    |   |
|                                                                                                                                                             |   |                    |        |                         |   |
| OTHER LIABILITIES                                                                                                                                                |   | 1,069,697               |        | 2,002,761                    |   |
|                                                                                                                                                             |   | 45,493,617              |        | 68,687,554                   |   |
|                                                                                                                                                             |   |                    |        |                         |   |
| STOCKHOLDERS’ EQUITY                                                                                                                                        |   |                    |        |                         |   |
| Preferred stock, par value $.01 per share;  authorized 2,500,000 shares;  no shares issued                                                                       |   | —                  |        | —                       |   |
| Common stock, par value $.01 per share;  authorized 10,000,000 shares; issued 6,437,719 shares June 30, 2004, and  5,686,434 shares September 30, 2003 |   | 64,377                  |        | 56,864                       |   |
| Additional paid-in capital                                                                                                                                       |   | 28,934,890              |        | 18,803,404                   |   |
| Retained earnings                                                                                                                                                |   | 54,234,339              |        | 52,489,031                   |   |
|                                                                                                                                                             |   | 83,233,606              |        | 71,349,299                   |   |
| Less cost of 99,200 shares of treasury  stock                                                                                                                    |   | (737,780                | )           | (737,780                     | )      |
|                                                                                                                                                             |   | 82,495,826              |        | 70,611,519                   |   |
|                                                                                                                                                             |   | $                       | 127,989,443 |                         | $      | 139,299,073 |   |

 

----

*From audited financialstatements.

See Notes to ConsolidatedFinancial Statements.

 

2

----

 

TODHUNTERINTERNATIONAL, INC.

# CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 
|                                         |   | **Nine  Months Ended June 30,** |       | **Three  Months Ended June 30,** |   |
|----------------------------------------------|--------|--------------------------------------|------------|---------------------------------------|--------|
|                                         |   | **2004**                             |       | **2003**                              |   | **2004** |   | **2003** |   |
|                                         |   |                                 |       |                                  |   |   |   |   |   |
| Sales                                        |   | $                                    | 88,954,982 |                                  | $      | 88,646,677 |   | $ | 32,537,957 |   | $ | 30,924,864 |   |
| Less excise taxes                            |   | 18,988,128                           |       | 22,769,722                            |   | 7,052,598 |   | 7,837,133 |   |
| Net sales                                    |   | 69,966,854                           |       | 65,876,955                            |   | 25,485,359 |   | 23,087,731 |   |
|                                         |   |                                 |       |                                  |   |   |   |   |   |
| Cost of goods sold                           |   | 47,611,349                           |       | 44,423,842                            |   | 18,109,695 |   | 15,022,995 |   |
| Gross profit                                 |   | 22,355,505                           |       | 21,453,113                            |   | 7,375,664 |   | 8,064,736 |   |
|                                         |   |                                 |       |                                  |   |   |   |   |   |
| Selling, general and administrative expenses |   | 21,593,343                           |       | 17,392,479                            |   | 8,889,050 |   | 6,305,257 |   |
| Operating income (loss)                      |   | 762,162                              |       | 4,060,634                             |   | (1,513,386 | ) | 1,759,479 |   |
|                                         |   |                                 |       |                                  |   |   |   |   |   |
| Other income (expense):                      |   |                                 |       |                                  |   |   |   |   |   |
| Interest income                              |   | 433,395                              |       | 570,479                               |   | 73,164 |   | 227,759 |   |
| Interest expense                             |   | (1,958,351                           | )          | (2,583,583                            | )      | (551,933 | ) | (985,150 | ) |
| Equity in income of equity investees         |   | 425,993                              |       | 325,970                               |   | 76,370 |   | 76,565 |   |
| Other, net                                   |   | 404,681                              |       | (1,363,999                            | )      | 111,110 |   | 94,622 |   |
|                                         |   | (694,282                             | )          | (3,051,133                            | )      | (291,289 | ) | (586,204 | ) |
|                                         |   |                                 |       |                                  |   |   |   |   |   |
| Income (loss) before income taxes            |   | 67,880                               |       | 1,009,501                             |   | (1,804,675 | ) | 1,173,275 |   |
|                                         |   |                                 |       |                                  |   |   |   |   |   |
| Income tax expense (benefit):                |   |                                 |       |                                  |   |   |   |   |   |
| Current                                      |   | (2,548,928                           | )          | (928,041                              | )      | (1,848,169 | ) | (883,657 | ) |
| Deferred                                     |   | 871,500                              |       | 109,500                               |   | 268,000 |   | 164,500 |   |
|                                         |   | (1,677,428                           | )          | (818,541                              | )      | (1,580,169 | ) | (719,157 | ) |
|                                         |   |                                 |       |                                  |   |   |   |   |   |
| Net Income (loss)                            |   | $                                    | 1,745,308  |                                  | $      | 1,828,042 |   | $ | (224,506 | ) | $ | 1,892,432 |   |
|                                         |   |                                 |       |                                  |   |   |   |   |   |
| Earnings (loss) per common share:            |   |                                 |       |                                  |   |   |   |   |   |
| Basic                                        |   | $                                    | 0.31       |                                  | $      | 0.33 |   | $ | (0.04 | ) | $ | 0.34 |   |
| Diluted                                      |   | $                                    | 0.30       |                                  | $      | 0.32 |   | $ | (0.04 | ) | $ | 0.34 |   |
|                                         |   |                                 |       |                                  |   |   |   |   |   |
| Common shares and equivalents outstanding:   |   |                                 |       |                                  |   |   |   |   |   |
| Basic                                        |   | 5,620,427                            |       | 5,572,608                             |   | 5,647,782 |   | 5,574,322 |   |
| Diluted                                      |   | 5,737,336                            |       | 5,639,825                             |   | 5,647,782 |   | 5,647,923 |   |

 

See Notes to ConsolidatedFinancial Statements.

 

3

----

 

TODHUNTER INTERNATIONAL, INC.

# CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 
|                                                                               |   | **Nine  Months Ended June 30,** |       |
|------------------------------------------------------------------------------------|--------|--------------------------------------|------------|
|                                                                               |   | **2004**                             |       | **2003** |   |
|                                                                               |   |                                 |       |   |   |
| CASH FLOWS FROM OPERATING ACTIVITIES                                               |   |                                 |       |   |   |
| Net income                                                                         |   | $                                    | 1,745,308  |   | $ | 1,828,042 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |   |                                 |       |   |   |
| Depreciation                                                                       |   | 3,966,232                            |       | 4,015,637 |   |
| Amortization                                                                       |   | 30,150                               |       | 30,150 |   |
| (Gain) loss on sale of property and  equipment                                     |   | (267,997                             | )          | 65,583 |   |
| Equity in income of equity investees                                               |   | (425,993                             | )          | (325,970 | ) |
| Deferred income taxes                                                              |   | 871,500                              |       | 109,500 |   |
|                                                                               |   |                                 |       |   |   |
| Changes in assets and liabilities:                                                 |   |                                 |       |   |   |
| (Increase) decrease in:                                                            |   |                                 |       |   |   |
| Receivables                                                                        |   | 1,072,554                            |       | (216,167 | ) |
| Inventories                                                                        |   | (2,986,544                           | )          | (4,588,038 | ) |
| Other current assets                                                               |   | (1,510,689                           | )          | 589,848 |   |
| Increase (decrease) in:                                                            |   |                                 |       |   |   |
| Accounts payable                                                                   |   | 1,856,934                            |       | 3,897,756 |   |
| Accrued expenses                                                                   |   | (2,357,002                           | )          | (181,611 | ) |
| Other liabilities                                                                  |   | (933,064                             | )          | 421,878 |   |
| Net cash provided by operating activities                                          |   | 1,061,389                            |       | 5,646,608 |   |
|                                                                               |   |                                 |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES                                               |   |                                 |       |   |   |
| Proceeds from sale of property and  equipment                                      |   | 503,591                              |       | 60,152 |   |
| Principal payments received on notes  receivable                                   |   | 86,709                               |       | 92,046 |   |
| Purchase of property and equipment                                                 |   | (3,956,717                           | )          | (2,763,400 | ) |
| Purchase of short-term investments                                                 |   | —                               |       | (103,603 | ) |
| Disbursements for notes receivable                                                 |   | —                               |       | (506,000 | ) |
| Redemption of short-term investments                                               |   | 1,603,601                            |       | 98,000 |   |
| Investments in subsidiaries                                                        |   | —                               |       | 24,182 |   |
| (Increase) decrease in other assets                                                |   | (287,659                             | )          | 794,589 |   |
| Net cash used in investing activities                                              |   | $                                    | (2,050,475 | ) | $ | (2,304,034 | ) |

 

4

----

 
|                                                  |   | **Nine  Months Ended June 30,** |        |
|-------------------------------------------------------|--------|--------------------------------------|-------------|
|                                                  |   | **2004**                             |        | **2003** |   |
|                                                  |   |                                 |        |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES                  |   |                                 |        |   |   |
| Net borrowings (payments) on line of credit           |   | $                                    | (18,750,000 | ) | $ | 50,000 |   |
| Issuance of common stock, net of  transaction costs   |   | 10,138,999                           |        | 32,500 |   |
| Disbursements for loan costs                          |   | (67,500                              | )           | — |   |
| Principal payments on long-term borrowings            |   | (3,102,305                           | )           | (3,166,803 | ) |
| Net cash used in financing activities                 |   | (11,780,806                          | )           | (3,084,303 | ) |
|                                                  |   |                                 |        |   |   |
| Net increase (decrease) in cash and cash  equivalents |   | (12,769,892                          | )           | 258,271 |   |
|                                                  |   |                                 |        |   |   |
| Cash and cash equivalents:                            |   |                                 |        |   |   |
| Beginning                                             |   | 14,918,605                           |        | 13,946,736 |   |
| Ending                                                |   | $                                    | 2,148,713   |   | $ | 14,205,007 |   |
|                                                  |   |                                 |        |   |   |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW  INFORMATION    |   |                                 |        |   |   |
| Cash payments (refunds) for:                          |   |                                 |        |   |   |
| Interest                                              |   | $                                    | 1,987,668   |   | $ | 2,580,428 |   |
| Income taxes                                          |   | $                                    | (1,339,140  | ) | $ | (595,939 | ) |

 

See Notes toConsolidated Financial Statements.

 

5

----

 

TODHUNTER INTERNATIONAL, INC.

 

# NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1.   Basis of Presentation

 

The consolidated financial statements included herein have been preparedby the Company, without audit, pursuant to the rules and regulations of theSecurities and Exchange Commission. Certain information and footnote disclosures normally included infinancial statements prepared in accordance with accounting principlesgenerally accepted in the United States of America have been condensed oromitted pursuant to such rules and regulations.  In the opinion of management, all adjustments, consisting only ofnormal recurring adjustments, except for the retirement of the ExecutiveOfficer (see Note 7), necessary for a fair presentation of the financialinformation for the periods indicated have been included.  For further information regarding theCompany’s accounting policies, refer to the consolidated financial statementsand related notes included in the Company’s Annual Report on Form 10-K for theyear ended September 30, 2003.

 

Aggregate amortization expenses were $30,150 for the nine months endedJune 30, 2004 and 2003, and $10,050 for the three months endedJune 30, 2004 and 2003.

 

The Company applies Accounting Principles Board Opinion Number 25, *Accounting for Stock Issued to Employees*(“APB 25”) and related interpretations in accounting for options granted, whichrequires compensation expense for the Company’s options to be recognized onlyif the market price of the underlying stock exceeds the exercise price on thedate of grant.  Accordingly, the Companyhas not recognized compensation expense for its options granted after 1994.  Statement of Financial Accounting Standards(“SFAS”) No. 123, *Accounting for Stock-BasedCompensation*, issued in October 1995, requires pro formadisclosures for option grants made after December 31, 1994, whenaccounting for stock-based compensation plans in accordance with APB 25.

 

If the Company elected to recognize compensation cost based on the fairvalue of the options granted at grant date as prescribed by SFAS No. 123, netincome (loss) and earnings (loss) per common share would have been reduced tothe pro forma amounts show below:

 
|                                           |   | **Nine  Months Ended  June 30,** |      | **Three  Months Ended  June 30,** |   |
|------------------------------------------------|--------|---------------------------------------|-----------|----------------------------------------|--------|
|                                           |   | **2004**                              |      | **2003**                               |   | **2004** |   | **2003** |   |
|                                           |   |                                  |      |                                   |   |   |   |   |   |
| Net income (loss), as reported                 |   | $                                     | 1,745,308 |                                   | $      | 1,828,042 |   | $ | (224,506 | ) | $ | 1,892,432 |   |
| Compensation costs, net of income taxes        |   | 42,034                                |      | 126,103                                |   | — |   | 42,034 |   |
| Net income (loss), pro forma                   |   | 1,703,274                             |      | 1,701,939                              |   | (224,506 | ) | 1,850,398 |   |
| Earnings (loss) per common share, as  reported |   |                                  |      |                                   |   |   |   |   |   |
| Basic                                          |   | 0.31                                  |      | 0.33                                   |   | (0.04 | ) | 0.34 |   |
| Diluted                                        |   | 0.30                                  |      | 0.32                                   |   | (0.04 | ) | 0.34 |   |
| Earnings (loss) per common share, pro forma    |   |                                  |      |                                   |   |   |   |   |   |
| Basic                                          |   | 0.31                                  |      | 0.30                                   |   | (0.04 | ) | 0.33 |   |
| Diluted                                        |   | 0.30                                  |      | 0.30                                   |   | (0.04 | ) | 0.33 |   |
|                                                |        |                                       |           |                                        |        |  |  |  |  |  |  |  |  |

 

6

----

 

Note 2.   Inventories

 

The major components ofinventories are:

 

|                       |   | **June 30,  2004** |       | **September 30,  2003** |   |
|----------------------------|--------|-------------------------|------------|------------------------------|--------|
|                       |   | **(Unaudited)**         |       |                         |   |
|                       |   |                    |       |                         |   |
| Finished goods             |   | $                       | 19,147,731 |                         | $      | 15,588,106 |   |
| Work in process            |   | 2,395,467               |       | 3,380,434                    |   |
| Raw materials and supplies |   | 10,108,241              |       | 9,696,355                    |   |
|                       |   |                    |       |                         |   |
|                       |   | $                       | 31,651,439 |                         | $      | 28,664,895 |   |

 

Note 3.   Financing Arrangements

 

Long-term debt consists ofthe following as of June 30, 2004:

 
| Term loans under a credit agreement (i)  (ii), interest payable monthly based on either the Eurodollar or prime rate  at the Company’s option, plus an applicable margin as defined in the  agreement.  The interest rate at  June 30, 2004 was 4.34%.  Future  minimum quarterly principal installments of $1,000,000 through  September 30, 2006 with any remaining balance due September 30,  2006. |   | $          | 29,000,000 |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------|------------|--------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |       |       |
| Revolving loans under a credit agreement  (i), interest payable quarterly based on either the Eurodollar or prime rate  at the Company’s option, plus an applicable margin as defined in the  agreement.  The blended interest rate  at June 30, 2004 was 3.60%.  The  revolving line of credit terminates in September 2006.                                                                               |   | 250,000    |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |       |       |
| Other                                                                                                                                                                                                                                                                                                                                                                                                                                |   | 213,312    |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | 29,463,312 |       |
| Less current maturities                                                                                                                                                                                                                                                                                                                                                                                                              |   | 4,000,000  |       |
|                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | $          | 25,463,312 |   |

 

----

(i)    In October 2001, the Company entered into a$70 million credit agreement, consisting of a $40 million term loan and a $30million revolving loan facility.  DuringMarch 2004, the credit agreement was amended to reduce the revolving loanfacility to $15 million.  In June 2004, the credit agreement wasmodified to extend the maturity date of the revolving loans to be the same asthe term loans, September 2006.  Thecredit agreement is collateralized principally by all assets located in theUnited States of America.  Under thecredit agreement, the Company has certain limitations in its ability to paydividends to stockholders.  Also, theCompany is required to maintain certain financial covenants under the creditagreement.

 

(ii)   In additionto quarterly principal payments,the Company may be required to make additional principal payments based onresults of the Company’s domestic operating profits, as defined in theagreement.

 

7

----

 

Note 4.   Earnings (Loss) Per Common Share

 

Basic earnings (loss) percommon share are calculated by dividing net income (loss) by the average commonshares outstanding.  On a diluted basis,shares outstanding are adjusted to assume the exercise of stock options.

 
|                                                                                                 |   | **Nine  Months Ended  June 30,** |      | **Three  Months Ended  June 30,** |   |
|------------------------------------------------------------------------------------------------------|--------|---------------------------------------|-----------|----------------------------------------|--------|
|                                                                                                 |   | **2004**                              |      | **2003**                               |   | **2004** |   | **2003** |   |
|                                                                                                 |   |                                  |      |                                   |   |   |   |   |   |
| Net income (loss)                                                                                    |   | $                                     | 1,745,308 |                                   | $      | 1,828,042 |   | $ | (224,506 | ) | $ | 1,892,432 |   |
| Determination of shares:                                                                             |   |                                  |      |                                   |   |   |   |   |   |
| Weighted average number of common shares  outstanding                                                |   | 5,620,427                             |      | 5,572,608                              |   | 5,647,782 |   | 5,574,322 |   |
| Shares issuable on exercise of stock  options, net of shares assumed to be purchased out of proceeds |   | 116,909                               |      | 67,217                                 |   | — | *  | 73,601 |   |
| Average common shares outstanding for  diluted earnings per share computation                        |   | 5,737,336                             |      | 5,639,825                              |   | 5,647,782 |   | 5,647,923 |   |
|                                                                                                 |   |                                  |      |                                   |   |   |   |   |   |
| Earnings (loss) per common share:                                                                    |   |                                  |      |                                   |   |   |   |   |   |
| Basic                                                                                                |   | $                                     | 0.31      |                                   | $      | 0.33 |   | $ | (0.04 | ) | $ | 0.34 |   |
| Diluted                                                                                              |   | $                                     | 0.30      |                                   | $      | 0.32 |   | $ | (0.04 | ) | $ | 0.34 |   |

 

----

*      The effect of stock options have not beenincluded for the three months ended June 30, 2004, as their effect wouldhave been anti-dilutive.

 

The Company’s Virgin Islands subsidiary, through the EconomicDevelopment Commission of the Government of the Virgin Islands of the UnitedStates, has received a 90% exemption from income taxes on operatingincome.  This exemption is effectivethrough September 2020.  The pershare effect of this exemption on earnings (on a diluted basis) was to increaseearnings per share by $0.19 and $0.06 for the nine and three months endedJune 30, 2004, respectively, and $0.15 and $0.06 for the nine and threemonths ended June 30, 2003, respectively.

 

8

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Note 5.   Segmentand Geographical Information

 

The Company operates primarily in the beverage alcohol industry in theUnited States.  The Company reports itsoperating results in four segments:

 

•      Bulk Alcohol Products (rum,citrus brandy, citrus spirits, cane spirits, fortified citrus wine, purchaseddistilled products and byproducts)

•      Premium Branded Spirits(primarily Cruzan Estate Rums and Cruzan Flavored Rums)

•      Bottling Operations(contract bottling services and proprietary and private label products)

•      Vinegar and Cooking Wine(bulk vinegar, bulk cooking wine, vinegar stock and proprietary and privatelabel case goods)

 

Corporate Operations includes expenses related to the Company’sexecutive offices that are not allocated to its reportable segments.  These expenses include payroll and relatedexpenses, professional fees, consulting fees, rent for the Company’s executiveoffices, insurance expense, directors’ fees and utilities.

 

The accounting policies of the reportable segments are the same asthose referred to in Note 1 to the consolidated financial statements located inItem 8 of the Company’s Annual Report on Form 10-K for the year endedSeptember 30, 2003.  The Companyevaluates the performance of its operating segments based on income beforeincome taxes, equity in income or loss of equity investees, interest income andinterest expense. Material intersegment sales and transfers have beeneliminated.

 

9

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Net sales, operating income (loss), depreciation and amortization, andcapital expenditures for the Company’s reportable segments for the nine andthree months ended June 30, 2004 and 2003, and identifiable assets as ofJune 30, 2004 and 2003, were as follows:

 
|                               |   | **Nine  Months Ended  June 30,** |    | **Three  Months Ended  June 30,** |       |
|------------------------------------|--------|---------------------------------------|---------|----------------------------------------|------------|
|                               |   | **2004**                              |    | **2003**                               |       | **2004** |   | **2003** |   |
|                               |   | **(in  thousands)**                   |    | **(in  thousands)**                    | ** ** |
| **Net Sales**                      |   |                                  |    |                                   |       |   |   |   |   |
| Bulk Alcohol Products              |   | $                                     | 27,024  |                                   | $          | 26,276 |   | $ | 9,898 |   | $ | 8,749 |   |
| Premium Branded Spirits            |   | 18,708                                |    | 13,521                                 |       | 7,184 |   | 4,796 |   |
| Bottling Operations                |   | 8,799                                 |    | 10,953                                 |       | 3,252 |   | 4,542 |   |
| Vinegar and Cooking Wine           |   | 15,436                                |    | 15,127                                 |       | 5,151 |   | 5,001 |   |
|                               |   | $                                     | 69,967  |                                   | $          | 65,877 |   | $ | 25,485 |   | $ | 23,088 |   |
|                               |   |                                  |    |                                   |       |   |   |   |   |
| **Operating Income  (Loss)**       |   |                                  |    |                                   |       |   |   |   |   |
| Bulk Alcohol Products              |   | $                                     | 8,386   |                                   | $          | 8,673 |   | $ | 2,195 |   | $ | 2,900 |   |
| Premium Branded Spirits            |   | (4,669                                | )       | (1,290                                 | )          | (2,781 | ) | (544 | ) |
| Bottling Operations                |   | (2,445                                | )       | (1,450                                 | )          | (723 | ) | 287 |   |
| Vinegar and Cooking Wine           |   | 2,539                                 |    | 2,947                                  |       | 915 |   | 895 |   |
| Corporate Operations and Other     |   | (3,049                                | )       | (4,819                                 | )          | (1,119 | ) | (1,779 | ) |
|                               |   | $                                     | 762     |                                   | $          | 4,061 |   | $ | (1,513 | ) | $ | 1,759 |   |
| **Depreciation and  Amortization** |   |                                  |    |                                   |       |   |   |   |   |
| Bulk Alcohol Products              |   | $                                     | 2,281   |                                   | $          | 2,424 |   | $ | 707 |   | $ | 815 |   |
| Premium Branded Spirits            |   | 88                                    |    | 72                                     |       | 33 |   | 22 |   |
| Bottling Operations                |   | 1,196                                 |    | 1,099                                  |       | 390 |   | 401 |   |
| Vinegar and Cooking Wine           |   | 356                                   |    | 362                                    |       | 119 |   | 120 |   |
| Corporate Operations and Other     |   | 75                                    |    | 89                                     |       | 25 |   | 30 |   |
|                               |   | $                                     | 3,996   |                                   | $          | 4,046 |   | $ | 1,274 |   | $ | 1,388 |   |
|                               |   |                                  |    |                                   |       |   |   |   |   |
| **Capital  Expenditures**          |   |                                  |    |                                   |       |   |   |   |   |
| Bulk Alcohol Products              |   | $                                     | 2,079   |                                   | $          | 1,370 |   | $ | 599 |   | $ | 298 |   |
| Premium Branded Spirits            |   | 221                                   |    | 71                                     |       | 41 |   | 55 |   |
| Bottling Operations                |   | 1,611                                 |    | 1,178                                  |       | 708 |   | 171 |   |
| Vinegar and Cooking Wine           |   | 41                                    |    | 68                                     |       | 22 |   | 34 |   |
| Corporate Operations and Other     |   | 5                                     |    | 76                                     |       | — |   | 65 |   |
|                               |   | $                                     | 3,957   |                                   | $          | 2,763 |   | $ | 1,370 |   | $ | 623 |   |
|                               |   |                                  |    |                                   |       |   |   |   |   |
| **Identifiable Assets**            |   |                                  |    |                                   |       |   |   |   |   |
| Bulk Alcohol Products              |   | $                                     | 64,395  |                                   | $          | 76,132 |   |   |   |   |   |
| Premium Branded Spirits            |   | 8,033                                 |    | 7,673                                  |       |   |   |   |   |
| Bottling Operations                |   | 25,760                                |    | 25,150                                 |       |   |   |   |   |
| Vinegar and Cooking Wine           |   | 19,730                                |    | 19,753                                 |       |   |   |   |   |
| Corporate Operations and Other     |   | 10,071                                |    | 12,380                                 |       |   |   |   |   |
|                               |   | $                                     | 127,989 |                                   | $          | 141,088 |   |   |   |   |   |

 

10

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Net sales and operating income (loss) for the nine and three monthsended June 30, 2004 and 2003 and identifiable assets as of June 30,2004 and 2003, classified by geographic area, were as follows:

 
|                    |   | **United  States** |   | **U. S.  Virgin  Islands and the  Bahamas** |   | **Consolidated** |   |
|-------------------------|--------|--------------------|--------|---------------------------------------------|--------|------------------|--------|
|                    |   |               |   | **(in  thousands)**                         |   |             |   |
| **Nine Months Ended**   |   |               |   |                                        |   |             |   |
|                    |   |               |   |                                        |   |             |   |
| June 30, 2004:     |   |               |   |                                        |   |             |   |
| Net sales               |   | $                  | 60,718 |                                        | $      | 9,249            |   | $ | 69,967 |   |
| Operating income (loss) |   | (2,203             | )      | 2,965                                       |   | 762              |   |
| Identifiable assets     |   | 97,450             |   | 30,539                                      |   | 127,989          |   |
|                    |   |               |   |                                        |   |             |   |
| June 30, 2003:     |   |               |   |                                        |   |             |   |
| Net sales               |   | $                  | 57,561 |                                        | $      | 8,316            |   | $ | 65,877 |   |
| Operating income        |   | 1,603              |   | 2,458                                       |   | 4,061            |   |
| Identifiable assets     |   | 96,023             |   | 45,065                                      |   | 141,088          |   |
|                    |   |               |   |                                        |   |             |   |
| **Three Months Ended**  |   |               |   |                                        |   |             |   |
|                    |   |               |   |                                        |   |             |   |
| June 30, 2004:     |   |               |   |                                        |   |             |   |
| Net sales               |   | $                  | 21,970 |                                        | $      | 3,515            |   | $ | 25,485 |   |
| Operating income (loss) |   | (2,578             | )      | 1,245                                       |   | (1,513           | )      |
|                    |   |               |   |                                        |   |             |   |
| June 30, 2003:     |   |               |   |                                        |   |             |   |
| Net sales               |   | $                  | 20,078 |                                        | $      | 3,010            |   | $ | 23,088 |   |
| Operating income        |   | 614                |   | 1,145                                       |   | 1,759            |   |

 

Included in net sales for the United States are export sales, primarilyto Europe, Canada and the Caribbean, totaling approximately $6,776,000 and$2,750,000 for the nine and three months ended June 30, 2004,respectively, and $6,203,000 and $2,506,000 for the nine and three months endedJune 30, 2003, respectively.

 

Note 6.  Supplemental EmployeeRetirement Plan

 

During the second quarter of fiscal 2004, the Company’s Compensationand Stock Option Committee approved a supplemental employee retirement plan forcertain key executives of the Company. The plan is an unfunded plan within the meaning of Financial AccountingStandard 132.  The net periodic benefitcost for the nine and three months ended June 30, 2004 and 2003, was asfollows:

 
|                               |   | **Nine  Months Ended  June 30,** |   | **Three  Months Ended  June 30,** |   |
|------------------------------------|--------|---------------------------------------|--------|----------------------------------------|--------|
|                               |   | **2004**                              |   | **2003**                               |   | **2004** |   | **2003** |   |
| Amortization of prior service cost |   | $                                     | 88,055 |                                   | $      | — |   | $ | 66,041 |   | $ | — |   |
| Interest cost                      |   | 5,283                                 |   | —                                 |   | 3,962 |   | — |   |
| Total net periodic benefit cost    |   | $                                     | 93,338 |                                   | $      | — |   | $ | 70,003 |   | $ | — |   |

 

11

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Note 7.  Retirement of ExecutiveOfficers

 

On November 26, 2002, the Company announced the retirement andresignation of A. Kenneth Pincourt, Jr., its founder, Chairman and ChiefExecutive Officer.  The Company enteredinto a retirement agreement with Mr. Pincourt, setting forth the terms of hisretirement and resignation.  Theretirement agreement replaced Mr. Pincourt’s previous employment agreement.Under the retirement agreement, the Company elected to accelerate retirementbenefits under its deferred compensation program and to continue to paycompensation and provide related benefits through July 15, 2004, theremaining term of Mr. Pincourt’s previous employment contract.

 

Accelerated benefits under the deferred program amounted to $1,040,987,of which $549,220 had been accrued as of September 30, 2002. Mr.Pincourt’s deferred compensation was paid to him on December 13,2002.  Also under the retirementagreement, Mr. Pincourt will continue to receive monthly payments of $41,004through July 15, 2004, one bonus payment of $150,491, which was paid inOctober 2003, and a second bonus payment of $119,138 payable on or beforeAugust 31, 2004.  Among otherbenefits, Mr. Pincourt is also able to participate in any health insuranceplan, employee benefit plan or other arrangement made available by the Companyor its subsidiaries to its executives and key management employees, throughJuly 15, 2004.  The Companyrecorded a charge for the retirement of Mr. Pincourt during the first quarterof fiscal 2003.  The effect of thischarge was included in other expense in the Company’s consolidated statement ofincome and amounted to $1,503,925 before income taxes.

 

The following table summarizes the charge made during the first quarterof fiscal 2003 for Mr. Pincourt’s retirement:

 
| Deferred compensation                                             |   | $         | 1,040,987 |   |
|-------------------------------------------------------------------|--------|-----------|-----------|--------|
| Compensation and related benefits                                 |   | 1,012,158 |      |
| Total                                                             |   | 2,053,145 |      |
|                                                              |   |      |      |
| Less deferred compensation accrued as of  September 30, 2003 |   | (549,220  | )         |
| Charged to expense                                                |   | $         | 1,503,925 |   |

 

On May 22, 2003, the Company announced the retirement of Troy Edwards,its Chief Financial Officer, Secretary, Treasurer and Controller.  The Company recorded a charge for theretirement of Mr. Edwards of $207,683 during the third quarter of fiscal2003.  The effect of this charge wasincluded in other expense in the Company’s consolidated statement of income.

 

Note 8.  Issuance of CommonStock

 

During June 2004, the Company and Angostura Limited completed atransaction whereby Angostura Limited agreed to invest $10 million in theCompany in exchange for 714,285 shares of common stock, which equates to anequity issue price of $14.00 per share. The transaction was approved by the Board of Directors after having beendetermined to be fair to the public stockholders of the Company by the SpecialCommittee of Independent Directors of the Company.  In addition, Angostura Limited reimbursed one-half of theCompany’s expenses in connection with this transaction.  As a result of this transaction, AngosturaLimited’s ownership of the Company’s stock increased from 64% to 68%.

 

Note 9.  Income Taxes

 

The Company incurred losses for income tax purposes from its U.S.operations of $7.0 million and $4.0 million for the nine and three months endedJune 30, 2004, respectively.  TheCompany has recorded an income tax benefit in the Company’s consolidatedstatement of income and as a receivable included in other current assets on theCompany’s consolidated balance sheet.

 

12

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## **Item 2.**    Management’sDiscussion and Analysis of Financial Condition and Results of Operations

 

**Forward-LookingStatements**

 

This Quarterly Report on Form 10-Q, including “Management’s Discussionand Analysis of Financial Condition and Results of Operations” contains“Forward-Looking Statements,” as defined in section 27a of the SecuritiesAct of 1933, as amended, and Section 21e of the Securities Exchange Act of1934, as amended.  Forward-LookingStatements are statements other than historical information or statements ofcurrent condition and relate to future events or the future financialperformance of the Company.  SomeForward-Looking Statements may be identified by use of such terms as“believes,” “anticipates,” “intends” or “expects.”  Such Forward-Looking Statements involve known and unknown risks,uncertainties and other factors that may cause the actual results, performanceor achievements of the Company to be materially different from any futureresults, performance or achievements expressed or implied by suchForward-Looking Statements.  Thefollowing is a list of factors, among others, that could cause actual resultsto differ materially from those contemplated by the Forward-LookingStatements:  business conditions incertain market segments and industries and the general economy; competitivefactors, including increased competition and price pressures; availability ofthird-party component products at reasonable prices; increased excise taxes;foreign currency exposure; changes in product mix between and among productlines; lower than expected customer orders and quarterly seasonal fluctuationsof those orders; and product shipment interruptions.  The Company undertakes no obligation to update or revise anyForward-Looking Statements, whether as a result of new information, futureevents or otherwise.

 

**Introduction**

 

The following discussion and analysis summarizes the significantfactors affecting (i) consolidated results of operations of the Company for thenine months ended June 30, 2004 compared to the nine months endedJune 30, 2003, (ii) consolidated results of operations of the Company forthe three months ended June 30, 2004 compared to the three months endedJune 30, 2003, and (iii) financial liquidity and capital resources.  This discussion and analysis should be readin conjunction with the Company’s consolidated financial statements and notesthereto included herein.  Certainamounts presented in this Item 2 have been rounded to the nearest thousand orhundred thousand, as applicable, but the percentages calculated are based onactual amounts without rounding.

 

The Company operates primarily in the beverage alcohol industry in theUnited States.  The Company is a leadingproducer and supplier of rum, brandy, wine and spirits to other beveragealcohol manufacturers; produces, imports and markets premium branded spirits;bottles beverage alcohol and other beverages on a contract basis and under itsown labels; and produces vinegar and cooking wine.  The Company reports its operating results in four segments:  Bulk Alcohol Products (rum, citrus brandy,citrus spirits, cane spirits, fortified citrus wine, purchased distilledproducts and byproducts); Premium Branded Spirits (primarily Cruzan Estate Rumsand Cruzan Flavored Rums); Bottling Operations (contract bottling services andproprietary and private label products); and Vinegar and Cooking Wine (bulkvinegar, bulk cooking wine, vinegar stock and proprietary and private labelcase goods).

 

Information regarding the net sales, operating income and total assetsof each of the Company’s business segments and information regarding geographicareas is set forth in Note 5 to the consolidated financial statements.

 

The Company’s net sales and gross margins (gross profit as a percentageof net sales) vary depending on the mix of business among the Company’sproducts.  Historically, gross marginshave been highest in bulk alcohol products and premium branded spirits andlower in bottling operations and vinegar and cooking wine operations.

 

The Company’s customers often purchase bulk alcohol products insignificant quantities or place significant orders for contract bottlingservices, distilled spirits, vinegar and cooking wine.  Accordingly, the size and timing of purchaseorders and product shipments can cause operating results to fluctuatesignificantly from quarter to quarter. Additionally, some Company products generate higher profit margins thanothers, and changes in the Company’s product mix can cause gross margins tofluctuate.  Certain aspects of theCompany’s business are seasonal, with increased demand for the Company’scontract bottling services from April to October and increasedproduction of the Company’s bulk alcohol products from November to June,corresponding to the Florida citrus harvest. As a result of these factors, the Company’s operating results may varysignificantly from quarter to quarter.

 

13

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Net sales represent the Company’s gross sales less excise taxes. Excisetaxes are generally payable on sales of certain of the Company’s bulk alcoholproducts and on all alcohol products bottled by the Company.  However, there are no excise taxes paid onsales made to customers that have tax permits. Accordingly, excise taxes may vary significantly from period to perioddepending upon the Company’s product and customer mix.

 

**Results ofOperations**

 

The following table sets forth statement of income items as apercentage of net sales.

 
|                                          |   | **Nine  Months Ended  June 30,** |   | **Three  Months Ended  June 30,** |   |
|-----------------------------------------------|--------|---------------------------------------|--------|----------------------------------------|--------|
|                                          |   | **2004**                              |   | **2003**                               |   | **2004** |   | **2003** |   |
| Net sales                                     |   | 100.0                                 | %      | 100.0                                  | %      | 100.0 | % | 100.0 | % |
| Cost of goods sold                            |   | 68.0                                  |   | 67.4                                   |   | 71.1 |   | 65.1 |   |
| Gross margin                                  |   | 32.0                                  |   | 32.6                                   |   | 28.9 |   | 34.9 |   |
| Selling, general and administrative  expenses |   | 30.9                                  |   | 26.4                                   |   | 34.8 |   | 27.3 |   |
| Operating income (loss)                       |   | 1.1                                   |   | 6.2                                    |   | (5.9 | ) | 7.6 |   |
| Interest expense                              |   | (2.8                                  | )      | (3.9                                   | )      | (2.2 | ) | (4.3 | ) |
| Other income (expense), net                   |   | 1.8                                   |   | (0.8                                   | )      | 1.0 |   | 1.8 |   |
| Income (loss) before income taxes             |   | 0.1                                   |   | 1.5                                    |   | (7.1 | ) | 5.1 |   |
| Income tax benefit                            |   | 2.4                                   |   | 1.3                                    |   | 6.2 |   | 3.1 |   |
| Net income (loss)                             |   | 2.5                                   | %      | 2.8                                    | %      | (0.9 | )% | 8.2 | % |

 

The following table provides information on net sales of certainCompany products.

 
|                     |   | **Nine  Months Ended  June 30,** |   | **Three  Months Ended  June 30,** |   |
|--------------------------|--------|---------------------------------------|--------|----------------------------------------|--------|
|                     |   | **2004**                              |   | **2003**                               |   | **% Change** |   | **2004** |   | **2003** |   | **% Change** |   |
|                     |   | **(in  thousands)**                   |   |                                   |   | **(in  thousands)** |   |   |   |
|                     |   |                                  |   |                                   |   |   |   |   |   |   |   |   |   |
| Bulk Alcohol Products    |   | $                                     | 27,024 |                                   | $      | 26,276 |   | 2.8 |   | $ | 9,898 |   | $ | 8,749 |   | 13.1 |   |
| Premium Branded Spirits  |   | 18,708                                |   | 13,521                                 |   | 38.4 |   | 7,184 |   | 4,796 |   | 49.8 |   |
| Bottling Operations      |   | 8,799                                 |   | 10,953                                 |   | (19.7 | ) | 3,252 |   | 4,542 |   | (28.4 | ) |
| Vinegar and Cooking Wine |   | 15,436                                |   | 15,127                                 |   | 2.0 |   | 5,151 |   | 5,001 |   | 3.0 |   |
|                     |   | $                                     | 69,967 |                                   | $      | 65,877 |   | 6.2 |   | $ | 25,485 |   | $ | 23,088 |   | 10.4 |   |

 

14

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The following table provides unit sales volume data for certain Companyproducts.

 
|                                 |   | **Nine  Months Ended  June 30,** |   |     |   | **Three  Months Ended  June 30,** |   |     |   |
|--------------------------------------|--------|---------------------------------------|--------|----------|--------|----------------------------------------|--------|----------|--------|
|                                 |   | **2004**                              |   | **2003** |   | **% Change**                           |   | **2004** |   | **2003** |   | **% Change** |   |
|                                 |   | **(in  thousands)**                   |   |     |   | **(in  thousands)**                    |   |     |   |
|                                 |   |                                  |   |     |   |                                   |   |     |   |   |   |   |   |
| Bulk alcohol products:               |   |                                  |   |     |   |                                   |   |     |   |   |   |   |   |
| Distilled products, in proof gallons |   |                                  |   |     |   |                                   |   |     |   |   |   |   |   |
| Citrus Brandy                        |   | 992                                   |   | 1,131    |   | (12.2                                  | )      | 354      |   | 260 |   | 36.4 |   |
| Citrus Spirits                       |   | 110                                   |   | 238      |   | (54.0                                  | )      | 55       |   | 55 |   | (0.1 | ) |
| Rum                                  |   | 3,575                                 |   | 3,323    |   | 7.6                                    |   | 1,351    |   | 1,176 |   | 14.9 |   |
| Cane Spirits                         |   | 359                                   |   | 389      |   | (7.9                                   | )      | 142      |   | 144 |   | (2.0 | ) |
| Fortified wine, in gallons           |   | 8,404                                 |   | 7,559    |   | 11.2                                   |   | 3,081    |   | 2,531 |   | 21.7 |   |
| Premium branded spirits, in cases    |   | 517                                   |   | 360      |   | 43.4                                   |   | 175      |   | 133 |   | 30.8 |   |
| Bottling operations, in cases        |   | 2,289                                 |   | 2,876    |   | (20.4                                  | )      | 878      |   | 1,435 |   | (38.8 | ) |
| Vinegar                              |   |                                  |   |     |   |                                   |   |     |   |   |   |   |   |
| Bulk, in 100 grain gallons           |   | 3,912                                 |   | 4,290    |   | (8.8                                   | )      | 1,293    |   | 1,588 |   | (18.6 | ) |
| Cases                                |   | 364                                   |   | 396      |   | (8.1                                   | )      | 147      |   | 125 |   | 18.0 |   |
| Drums, in 100 grain gallons          |   | 1,193                                 |   | 1,162    |   | 2.7                                    |   | 543      |   | 389 |   | 39.8 |   |
| Cooking Wine                         |   |                                  |   |     |   |                                   |   |     |   |   |   |   |   |
| Bulk, in gallons                     |   | 2,017                                 |   | 3,226    |   | (37.5                                  | )      | 590      |   | 1,048 |   | (43.7 | ) |
| Cases                                |   | 500                                   |   | 476      |   | 5.2                                    |   | 135      |   | 126 |   | 7.3 |   |

 

**Nine months ended June 30, 2004 comparedto nine months ended June 30, 2003**.  Unless otherwise noted, references to 2004represent the nine-month period ended June 30, 2004 and references to 2003represent the nine-month period ended June 30, 2003.

 

*Net Sales*. Net saleswere $70.0 million in 2004, an increase of 6.2% from net sales of $65.9 millionin 2003.

 

Net sales of bulk alcoholproducts were $27.0 million in 2004, an increase of 2.8% from net sales of$26.3 million in 2003.  The increaseresulted primarily from increased shipments of rum and fortified wine offset bydecreased shipments of citrus brandy, citrus spirits and cane spirits.  The decrease in citrus brandy, citrusspirits and cane spirits was due in part to the timing of customer orders.  In addition, in 2003, the Company had salesof citrus and cane spirits to new customers that had difficulty sourcing bulkalcohol from their regular suppliers. These sales did not reoccur in 2004.

 

Net sales of premium branded spirits were $18.7 million in 2004, anincrease of 38.4% from net sales of $13.5 million in 2003.  During fiscal 2002, the Company had introduceda new line of Cruzan products in the ready-to-drink category.  During fiscal 2003, due to increasedcompetition and management’s expectation of limited growth potential within theready-to-drink product category, the Company made a strategic decision to exitthis category and concentrate on the growing segment of its premium brandedspirits business, Cruzan Estate Rums and Cruzan Flavored Rums.  In connection with management’s decision toexit the ready-to-drink product category, during the fourth quarter of fiscal2003, the Company entered into an agreement with a corporate trading company toreceive trade credits upon installment deliveries of the Company’s remaininginventory of ready-to-drink products. In 2004, net sales of premium branded spirits included $0.7 million ofCruzan ready-to-drink products sold to this trading company.  These sales represented the final sales ofinventories of such products.  ExcludingCruzan ready-to-drink product sales, net sales of premium branded spirits were$18.0 million in 2004, an increase of 33.2% from net sales of $13.5 million in2003, as the premium branded spirits segment continued its double-digit growth.

 

15

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Sales of the Company’s Cruzan Estate Rums andCruzan Flavored Rums increased 25.7% in 2004 compared to 2003.  Sales of Cruzan Estate Rums and CruzanFlavored Rums increased from $2.2 million in fiscal 1996 to $17.0 million infiscal 2003.  During this time, theCruzan brand has been recognized as one of the fastest growing brands in thespirits industry by certain beverage industry publications and the Cruzan Rumshave won numerous tasting awards from several prestigious beverage industryorganizations.  Recently, several of theCompany’s competitors have introduced their own lines of flavored rum productsinto the marketplace, which, in certain fiscal quarters, has negativelyimpacted the level of sales growth of Cruzan Flavored Rums.  Some of the Company’s competitors in the rumand flavored rum categories have significantly greater financial and otherresources than the Company, which could adversely affect the Company’s salesgrowth of Cruzan Estate Rums and Cruzan Flavored Rums. As a response to suchincreased competition, and in order to provide further impetus to the growth ofCruzan Flavored Rums, management has significantly increased its marketingbudget for fiscal 2004, causing a current increase in the operating loss forthis business segment.  Managementbelieves that by increasing its marketing budget and maintaining its focus onthe Cruzan brand, sales of Cruzan Estate Rums and Cruzan Flavored Rums willcontinue their double-digit growth for fiscal 2004.

 

Net sales of the Company’s bottling operations were $8.8 million in2004, a decrease of 19.7% from net sales of $11.0 million in 2003.  During the first quarter of fiscal 2004, theCompany lost a large private label bottling customer.  Net sales to this private label bottling customer wereapproximately $2.5 million and 193,719 cases for the year endedSeptember 30, 2003, or approximately 17.6% of bottling operations netsales and 5.2% of bottling operations volume. Net sales to this customer during 2003 were approximately $2.1 millionand 176,114 cases.  Also during 2004,excise taxes decreased $3.8 million compared to 2003, primarily due to thedecrease in sales to this private label bottling customer.  Management believes that the loss of thislow margin business will not have a material effect on the Company’sconsolidated results of operations or financial position.  Sales in the Company’s bottling operationsalso continued to decline as a result of a contraction in the ready-to-drinkproduct category, for which the Company is a major contract bottler.  Responding to this decline, in July 2004the Company completed the consolidation of its bottling operations to reduceoverhead.  However, bottling operationsvolume has not met even the Company’s reduced expectations for this year, whichhas caused a continuing loss in this segment. The Company is placing a renewed emphasis on the sales effort in thissegment, seeking other contract bottling opportunities.  Additional sales, coupled with savings to berealized from the consolidation, are expected to reverse this loss trend infuture quarters.

 

Net sales of vinegar and cooking wine were $15.4 million in 2004, anincrease of 2.0% from net sales of $15.1 million in 2003.

 

*Gross Profit*. Grossprofit was $22.4 million in 2004, an increase of 4.2% from gross profit of$21.5 million in 2003.  During 2004,bulk alcohol gross profit increased as a result of increased shipments of rumand fortified wine; premium branded spirits gross profit increased with sales;bottling operations gross profit decreased with sales; and vinegar and cookingwine gross profit decreased due to higher material cost.  Gross margin was 32.0% in 2004 and 32.6% in2003.

 

*Selling, General and Administrative Expenses*.  Selling, general and administrative expenseswere $21.6 million in 2004, an increase of 24.2% from $17.4 million in2003.  The increase was primarilyattributable to increased administrative, marketing and advertising expenses inthe Company’s premium branded spirits business as the Company continues toplace emphasis on this growing business segment.  Also during 2004, the Company’s Compensation and Stock OptionCommittee approved a new Supplemental Employee Retirement Plan for certain keyexecutives of the Company.  This newplan replaces a deferred compensation plan, which resulted in the cancellationof a $0.7 million liability which was credited to expense.

 

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**Results of Operations (Continued***)*

 

*Operating Income.*  The following table sets forth the operatingincome (loss) by reportable segment of the Company for 2004 and 2003.

 
|                     |   | **Nine  Months Ended  June 30,** |   |     |   |
|--------------------------|--------|---------------------------------------|--------|----------|--------|
|                     |   | **2004**                              |   | **2003** |   | **% Change** |   |
|                     |   | **(In thousands)**                    |   |     |   |
| Bulk Alcohol Products    |   | $                                     | 8,386  |     | $      | 8,673 |   | (3.3 | ) |
| Premium Branded Spirits  |   | (4,669                                | )      | (1,290   | )      | — |   |
| Bottling Operations      |   | (2,445                                | )      | (1,450   | )      | — |   |
| Vinegar and Cooking Wine |   | 2,539                                 |   | 2,947    |   | (13.9 | ) |
| Corporate Operations     |   | (3,049                                | )      | (4,819   | )      | — |   |
|                     |   | $                                     | 762    |     | $      | 4,061 |   | (81.2 | ) |

 

As a result of the above factors, operating income was $0.8 million in2004, a decrease of 81.2% from operating income of $4.1 million in 2003.

 

The Company’s premium branded spirits segment experienced operatinglosses of $4.7 million in 2004 and $1.3 million in 2003.  The operating losses reflected the Company’scontinuing efforts to increase market share by reinvesting segment grossprofits in selling and marketing expenses.

 

As a result of the factors described under “Net Sales” above, theCompany’s bottling operations segment reported an operating loss of $2.4million in 2004 and $1.5 million in 2003.

 

*Interest Expense*.Interest expense was $2.0 million in 2004 and $2.6 million in 2003.  The Company’s borrowing rates and averageborrowings were lower in 2004 compared to 2003.

 

*Other Expense*.  On November 26, 2002, the Companyannounced the retirement and resignation of A. Kenneth Pincourt, Jr., its Founder,Chairman and Chief Executive Officer. The Company has entered into a retirement agreement with Mr. Pincourt,setting forth the terms of his retirement and resignation.  The retirement agreement replaces Mr.Pincourt’s previous employment agreement. Under the retirement agreement, theCompany elected to accelerate retirement benefits under its deferredcompensation program and to continue to pay compensation and provide relatedbenefits through July 15, 2004, the remaining term of Mr. Pincourt’s previousemployment contract.

 

Accelerated benefits under the deferred program amounted to $1,040,987,of which $549,220 had been accrued as of September 30, 2002. Mr.Pincourt’s deferred compensation was paid to him on December 13,2002.  Also under the retirementagreement, Mr. Pincourt continued to receive monthly payments of $41,004through July 15, 2004, one bonus payment of $150,491, which was paid inOctober 2003, and a second bonus payment of $119,138 payable on or beforeAugust 31, 2004.  Among otherbenefits, Mr. Pincourt was also able to participate in any health insuranceplan, employee benefit plan or other arrangement made available by the Companyor its subsidiaries to its executives and key management employees, throughJuly 15, 2004.  The Companyrecorded a charge for the retirement of Mr. Pincourt during 2003.  The effect of this charge was included inother expense in the Company’s consolidated statement of income and amounted to$1,503,925 before income taxes.

 

17

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The following table summarizes the charge made during 2003 for Mr.Pincourt’s retirement:

 
| Deferred compensation                                             |   | $         | 1,040,987 |   |
|-------------------------------------------------------------------|--------|-----------|-----------|--------|
| Compensation and related benefits                                 |   | 1,012,158 |      |
| Total                                                             |   | 2,053,145 |      |
|                                                              |   |      |      |
| Less deferred compensation accrued as of  September 30, 2002 |   | (549,220  | )         |
| Charged to expense                                                |   | $         | 1,503,925 |   |

 

OnMay 22, 2003, the Company announced the retirement of Troy Edwards, its ChiefFinancial Officer, Secretary, Treasurer and Controller.  The Company recorded a charge for the retirementof Mr. Edwards of $207,683 during the third quarter of fiscal 2003.  The effect of this charge was included inother expense in the Company’s consolidated statement of income.

 

*Income Tax Expense. *During 2004 and 2003, the Companyincurred operating losses from its U.S. operations and recorded an income taxbenefit of $1.7 million and $0.8 million, respectively.  The Company’s Virgin Islands subsidiary hasa 90% exemption from U.S. Virgin Islands income taxes.  The exemption is effective through September 2020.  In addition, the Company benefited from theextraterritorial income exclusion in 2004 and 2003.

 

**Three months ended June 30, 2004compared to three months ended June 30, 2003**.  Unless otherwise noted, references to 2004represent the three-month period ended June 30, 2004 and references to2003 represent the three-month period ended June 30, 2003.

 

*Net Sales.*Net saleswere $25.5 million in 2004, an increase of 10.4% from net sales of $23.1million in 2003.

 

Net sales of bulk alcohol products were $9.9 million in 2004, anincrease of 13.1% from net sales of $8.7 million in 2003.  The increase resulted primarily fromincreased shipments of citrus brandy, rum and fortified wine offset bydecreased shipments of citrus and cane spirits due to timing of customerorders.

 

Net sales of premium branded spirits were $7.2 million in 2004, anincrease of 49.8% from net sales of $4.8 million in 2003.  Sales of the Company’s Cruzan Estate Rumsand Cruzan Flavored Rums increased 48.9% in 2004 compared to 2003.  Sales of Cruzan Estate Rums and CruzanFlavored Rums increased from $2.2 million in fiscal 1996 to $17.0 million infiscal 2003.  During this time, theCruzan brand has been recognized as one of the fastest growing brands in thespirits industry by certain beverage industry publications and the Cruzan Rumshave won numerous tasting awards from several prestigious beverage industryorganizations.  Recently, several of theCompany’s competitors have introduced their own lines of flavored rum productsinto the marketplace, which, in certain fiscal quarters, has negativelyimpacted the level of sales growth of Cruzan Flavored Rums.  Some of the Company’s competitors in the rumand flavored rum categories have significantly greater financial and otherresources than the Company, which could adversely affect the Company’s salesgrowth of Cruzan Rums and Cruzan Flavored Rums. As a response to such increasedcompetition, and in order to provide further impetus to the growth of CruzanFlavored Rums, management has significantly increased its marketing budget forfiscal 2004, causing a current increase in the operating loss for this businesssegment.  Management believes that byincreasing its marketing budget and maintaining its focus on the Cruzan brand,sales of Cruzan Estate Rums and Cruzan Flavored Rums will continue theirdouble-digit growth for fiscal 2004.

 

Net sales of the Company’s bottling operations were $3.3 million in2004, a decrease of 28.4% from net sales of $4.5 million in 2003.  During fiscal 2004, the Company lost a largeprivate label bottling customer.  Netsales to this private label bottling customer were approximately $2.5 millionand 193,719 cases for the year ended September 30, 2003, or approximately17.6% of bottling operations net sales and 5.2% of bottling operationsvolume.  Net sales to this customerduring 2003 were approximately $0.6 million and 55,499 cases.  Also during 2004, excise taxes decreased $0.8million compared to 2003, primarily due to the decrease in sales to this privatelabel bottling customer.  Managementbelieves that the loss of this low margin business will not have a materialeffect on the Company’s consolidated results of operations or financialposition.  Sales in the Company’sbottling operations also

 

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continued to decline as a result of a contraction in the ready-to-drinkproduct category, for which the Company is a major contract bottler.  Responding to this decline, inJuly 2004 the Company completed the consolidation of its bottlingoperations to reduce overhead.  However,bottling operations volume has not met even the Company’s reduced expectationsfor this year, which has caused a continuing loss in this segment.  The Company is placing a renewed emphasis onthe sales effort in this segment, seeking other contract bottlingopportunities.  Additional sales,coupled with savings to be realized from the consolidation, are expected toreverse this loss trend in future quarters.

 

Net sales of vinegar and cooking wine were $5.2 million in 2004, anincrease of 3.0% from net sales of $5.0 million in 2003.

 

*Gross Profit*. Grossprofit was $7.4 million in 2004, a decrease of 8.5% from gross profit of $8.1million in 2003.  Gross margin was 28.9%in 2004 compared to 34.9% in 2003. Gross profit increases in premium branded spirits were offset byincreased raw material costs in bulk alcohol products and decreased sales inbottling operations.

 

*Selling, General and Administrative Expenses*.  Selling, general and administrative expenseswere $8.9 million in 2004, an increase of 41.0% from $6.3 million in 2003.  The increase was primarily attributable toincreased administrative, marketing and advertising expenses related to theCompany’s premium branded spirits business as the Company continues to placeemphasis on this growing business segment.

 

*Operating Income.*  The following table sets forth the operatingincome (loss) by reportable segment of the Company for 2004 and 2003.

 
|                           |   | **Three  Months Ended  June 30,** |   |     |   |
|--------------------------------|--------|----------------------------------------|--------|----------|--------|
|                           |   | **2004**                               |   | **2003** |   | **% Change** |   |
|                           |   | **(In thousands)**                     |   |     |   |
| Bulk Alcohol Products          |   | $                                      | 2,195  |     | $      | 2,900 |   | (24.3 | ) |
| Premium Branded Spirits        |   | (2,781                                 | )      | (544     | )      | — |   |
| Bottling Operations            |   | (723                                   | )      | 287      |   | — |   |
| Vinegar and Cooking Wine       |   | 915                                    |   | 895      |   | 2.2 |   |
| Corporate Operations and Other |   | (1,119                                 | )      | (1,779   | )      | — |   |
|                           |   | $                                      | (1,513 | )        | $      | 1,759 |   | — |   |

 

As a result of the above factors, operating loss was $1.5 million in2004, compared to operating income of $1.8 million in 2003.

 

The Company’s premium branded spirits segment experienced operatinglosses of $2.8 million in 2004 and $0.5 million in 2003.  The operating loss reflected the Company’scontinuing efforts to increase market share by reinvesting segment grossprofits in selling and marketing expenses.

 

As a result of the factors described under “Net Sales” above, theCompany’s bottling operations segment reported an operating loss of $0.7million in 2004 compared to operating income of $0.3 million in 2003.

 

*Interest Expense*.Interest expense was $0.6 million in 2004 and $1.0 million in 2003.  The Company’s borrowing rates and averageborrowings were lower in 2004 compared to 2003.

 

*Income Tax Expense*.During 2004 and 2003, the Company incurred operating losses from its U.S.operations and recorded an income tax benefit of $1.6 million and $0.7 million,respectively.  The Company’s VirginIslands subsidiary has a 90% exemption from U.S. Virgin Islands incometaxes.  The exemption is effectivethrough September 2020.  Inaddition, the Company benefited from the extraterritorial income exclusion in2004 and 2003.

 

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**Financial Liquidityand Capital Resources**

 

**General**

 

The Company’s principal use of cash in its operating activities is forpurchasing raw materials to be used in its manufacturing operations and purchasingimported products for its premium branded spirits business.  The Company’s source of liquidity hashistorically been cash flow from operations and from borrowings on its line ofcredit.  Some of the Company’smanufacturing operations are seasonal and the Company’s borrowings on its lineof credit vary during the year.  Forexample, the Company uses citrus molasses as its primary raw material in theproduction of citrus brandy and spirits at its two Florida distilleries.  The Company buys citrus molasses, aby-product of citrus juice production, from local manufacturers of citrus juiceand concentrate during the citrus harvest, which generally runs fromNovember to June.  The Companybegins purchasing citrus molasses in November and, due to the short lifeof the citrus molasses it purchases, manufactures and builds inventory ofcitrus brandy and spirits through June. Another seasonal business of the Company is its contract bottlingservices.  Demand for contract bottlingservices is highest during the months from April through October.  Management believes that cash provided byits operating and financing activities will provide adequate resources tosatisfy its working capital, liquidity and anticipated capital expenditurerequirements for both its short-term and long-term capital needs.

 

**OperatingActivities**

 

Net cash provided by operating activities in 2004 was $1.1 million,which resulted from $5.9 million in net income adjusted for noncash items, and$4.8 million representing the net increase in operating assets and liabilities.

 

**Investingand Financing Activities**

 

Net cash used in investing activities in 2004 was $2.1 million, whichresulted primarily from $4.0 million of capital expenditures, offset byproceeds from the sale of property and equipment, collections on notesreceivable and redemptions of short-term investments.

 

Net cash used in financing activities in 2004 was $11.8 million, whichresulted primarily from payments of $3.1 million of long-term debt and $18.8million in payments on the Company’s line of credit, offset by $10.1 millionfrom the issuance of common stock.

 

During June 2004, the Company and Angostura Limited completed atransaction whereby Angostura Limited agreed to invest $10 million in theCompany in exchange for 714,285 shares of common stock, which equates to anequity issue price of $14.00 per share. The transaction was approved by the Board of Directors after having beendetermined to be fair to the public stockholders of the Company by the SpecialCommittee of Independent Directors of the Company.  In addition, Angostura Limited reimbursed one-half of theCompany’s expenses in connection with this transaction.  As a result of this transaction, AngosturaLimited’s ownership of the Company’s stock increased from 64% to 68%.  The Subscription Agreement for thistransaction also provides that the Company will use its best efforts tocomplete a rights offering pursuant to a registration statement to be filedwith the Securities and Exchange Commission. The rights offering will allow each stockholder of the Company, otherthan Angostura Limited and its affiliates, to purchase such holder’s pro rataamount of the number of shares of the common stock of the Company that willpermit the public stockholders in the aggregate to maintain the percentagestock ownership the public stockholders owned prior to the stock purchase byAngostura Limited.  It is expected thatthe number of shares available to be sold pursuant to the rights offering willbe approximately 408,000 and the per share purchase price of the rightsoffering will be the lesser of $14.00 or the closing price on the AmericanStock Exchange two days prior to the effective date of the registrationstatement.  The Company expects to filethe registration statement in August 2004.

 

The Company’s revolving credit facility provides for maximum borrowingsof $15 million.  Borrowings under thisfacility were $250,000 at June 30, 2004. During June 2004, the Company’s credit agreement was modified toextend the maturity date of the revolving loans to be the same as the termloans, September 2006.

 

The Company’s bank debt was $29.3 million as of June 30, 2004, andits ratio of total debt to equity was 0.55 to 1.

 

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The Company has not paid dividends to stockholders since becoming apublic company in 1992.  The Companyintends to continue to retain earnings for use in its business and, therefore,does not anticipate declaring or paying cash dividends in this fiscalyear.  Also, the Company is limited bythe credit agreement in its ability to pay dividends to stockholders.  In addition to quarterly term loan principalpayments required by the credit agreement, the Company may be required to makeadditional principal payments based on the results of the Company’s domesticoperating profits, as defined in the credit agreement.

 

The Company’s share of the undistributed earnings of the Bahamian andVirgin Islands subsidiaries was approximately $7.3 million and $31.6 million,respectively, as of September 30, 2003. See Note 10 to the Company’s consolidated financial statements includedin the Company’s Annual Report on Form 10-K for the year endedSeptember 30, 2003 for additional information on income taxes related tothese subsidiaries.

 

Based on current plans and business conditions, management expects thatits cash, cash equivalents, and short-term investments, together with anyamounts generated from operations and available borrowings, will be sufficientto meet the Company’s cash requirements for at least the next 12 months.

 

**Effects of Inflationand Changing Prices**

 

The Company’s results of operations and financial condition have notbeen significantly affected by inflation and changing prices.  The Company has been able, subject to normalcompetitive conditions, to pass along rising costs through increased sellingprices.

 

**Critical AccountingPolicies**

 

The Company’s significant accounting policies are more fully describedin Note 1 to the Company’s consolidated financial statements located in Item 8of its Annual Report on Form 10-K for the year ended September 30, 2003.The preparation of financial statements in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make estimates and assumptions that affect the reported amountsof assets, liabilities, revenues, and expenses, and the related disclosures ofcontingent assets and liabilities. Actual results could differ from thoseestimates under different assumptions or conditions. The Company believes thatthe following critical accounting policy is subject to estimates and judgmentsused in the preparation of its consolidated financial statements:

 

The Company has goodwill and intangible assets associated with businessacquisitions. The Company reviews these assets for impairment annually andwhenever an event occurs or circumstances change that would more likely thannot reduce the fair value of these assets below their carrying value.  If the fair value of these assets is lessthan their carrying value, then an impairment loss would be recognized equal tothe excess of the carrying value over the fair value of the asset.

 

**Off-Balance SheetArrangements**

 

The Company has no off-balance sheet arrangements that have or arereasonably likely to have a current or future effect on the Company’s financialcondition, changes in financial condition, revenues or expenses, results ofoperations, liquidity, capital expenditures or capital resources that arematerial to investors.  See RecentAccounting Pronouncements, below.

 

#### **Recent Accounting Pronouncements**

 

As of March 31, 2003, the Company adopted Financial AccountingStandards Board Interpretation No. 45 (“FIN 45”), Guarantor’s Accounting andDisclosure Requirements for Guarantees, Including Indirect Guarantees ofIndebtedness of Others.  FIN 45 requiresa guarantor to recognize at the inception of a guarantee, a liability for thefair value or market value, of the obligation undertaken in issuing theguarantee and must disclose the information in its interim and annual financialstatements.  The provisions related torecognizing a liability at inception for the fair value of the guarantor’sobligation does not apply to guarantees issued between entities under commoncontrol and therefore is not applicable to the Company.  Management believes that this standard doesnot have a material effect on the Company’s consolidated financial position orresults of operations.

 

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In January 2003, the Financial Accounting Standards Board issuedFinancial Accounting Standards Board Interpretation No. 46 (“FIN 46”),Consolidation of Variable Interest Entities. FIN 46 clarifies the application of Accounting Research Bulletin 51,Consolidated Financial Statements, for certain entities that do not havesufficient equity at risk for the entity to finance its activities withoutadditional subordinated financial support from other parties or in which equityinvestors do not have the characteristics of a controlling financial interest(“variable interest entities”). Variable interest entities within the scope of FIN 46 will be requiredto be consolidated by their primary beneficiary.  The primary beneficiary of a variable interest entity isdetermined to be the party that absorbs a majority of the entity’s expectedlosses, receives a majority of its expected returns, or both.  FIN 46 applied immediately to variableinterest entities created after January 31, 2003, and to variable interestentities in which the Company obtains an interest after that date.  FIN 46 was effective July 1, 2003 tovariable interest entities in which the Company holds a variable interest thatit acquired before February 1, 2003. Management believes this standard does not have a material effect on theCompany’s consolidated financial position or results of operations.

 

## **Item 3**.    Quantitative and QualitativeDisclosures About Market Risk

## ** **

The information required under this Item 3 is incorporated herein byreference to the Company’s Annual Report on Form 10-K for the year endedSeptember 30, 2003.  As ofJune 30, 2004, there have been no material changes for the informationprovided therein.

 

## **Item 4**.    Controls and Procedures

## ** **

**Evaluation ofDisclosure Controls and Procedures**

 

The Company maintains disclosure controls and procedures (as defined inRule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the“Exchange Act”) that are designed to ensure that information required to bedisclosed in the Company’s reports under the Exchange Act are recorded,processed, summarized and reported within the time periods specified in theSEC’s rules and forms, and that the information is accumulated and communicatedto the Company’s management, including the Company’s Chief Executive Officer andChief Financial Officer, as appropriate, to allow timely decisions regardingrequired disclosure.  In designing andevaluating the disclosure controls and procedures, management recognized thatany disclosure controls and procedures, no matter how well designed andoperated, can provide only reasonable assurance of achieving the desiredobjectives, and management was required to apply its judgment in evaluating thecost-benefit relationship of possible disclosure controls and procedures.  The Company’s management, with theparticipation of the Company’s Chief Executive Officer and Chief FinancialOfficer, has evaluated the effectiveness of the design and operation of theCompany’s disclosure controls and procedures as of the end of the periodcovered by this report.  Based upon thatevaluation and subject to the foregoing, the Company’s Chief Executive Officerand Chief Financial Officer concluded that the design and operation of theCompany’s disclosure controls and procedures provided reasonable assurance thatthe disclosure controls and procedures are effective to accomplish theirobjectives.

 

**Changes in InternalControl Over Financial Reporting**

 

In addition, management, including the Company’s Chief ExecutiveOfficer and Chief Financial Officer, reviewed the Company’s internal controlover financial reporting (as defined in Rule 13a-15(f) under the Exchange Act),and there have been no significant changes in the Company’s internal control orin other factors that could significantly affect the Company’s internal controlover financial reporting during the period covered by this report.

 

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**PART II. ****OTHER INFORMATION**

 

## **Item 2**.  Changes in Securities, Use of Proceeds andIssuer Purchases of Equity Securities

## ** **

During June 2004, the Company and Angostura Limited completed atransaction whereby Angostura Limited agreed to invest $10 million in theCompany in exchange for 714,285 shares of common stock, which equates to anequity issue price of $14.00 per share. The transaction was approved by the Board of Directors after having beendetermined to be fair to the public stockholders of the Company by the SpecialCommittee of Independent Directors of the Company.  In addition, Angostura Limited reimbursed one-half of theCompany’s expenses in connection with this transaction.  As a result of this transaction, AngosturaLimited’s ownership of the Company’s stock increased from 64% to 68%.

 

## **Item 6**.  Exhibits and Reports on Form 8-K

 
| 10.22(d) |   | Modification  of Credit Agreement, dated June 29, 2004, by and among Todhunter  International, Inc., SouthTrust Bank, acting as lender and Agent, and  Wachovia Bank, N.A. (2) |
|----------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 11.1     |   | Statement  of Computation of Per Share Earnings (1)                                                                                                                                 |
| 20.1     |   | Earnings  press release for the three— and nine-month periods ended June 30, 2004  (2)                                                                                    |
| 31.1     |   | Certification of Jay S. Maltby, Chairman, Chief Executive Officer and  President, pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934  (2)                            |
| 31.2     |   | Certification of Ezra Shashoua, Executive Vice President and Chief  Financial Officer, pursuant to Rule 13a-14(a) of the Securities Exchange Act  of 1934 (2)                       |
| 32.1     |   | Certification of Jay S. Maltby, Chairman, Chief Executive Officer and  President, pursuant to 18 U.S.C. Section 1350 (2)                                                       |
| 32.2     |   | Certification of Ezra Shashoua, Executive Vice President and Chief  Financial Officer, pursuant to 18 U.S.C. Section 1350 (2)                                                  |

 

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(1)           Filed herewith and incorporated herein by reference toNote 4 of notes to consolidated financial statements, included in Item 1 of theCompany’s Quarterly Report on Form 10-Q for the quarter ended June 30,2004.

 

(2)           Filed herewith.

 

**(b)****           Reports on Form 8-K**

 

Duringthe third quarter of fiscal 2004, the Company filed the following currentreport on Form 8-K:

 

(1)           Form 8-K dated June 9, 2004.  This Form 8-K reported information underItem 5 (Other Events and required FD Disclosure).

 

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### **Signatures**

 

Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 
| Date: August 13, 2004 | /s/ Jay S. Maltby                                    |   |
|----------------------------|------------------------------------------------------|--------|
|                       | Jay S. Maltby                                        |
|                       | Chairman, Chief Executive Officer and President      |
|                       |                                                 |
|                       |                                                 |
| Date: August 13, 2004 | /s/ Ezra Shashoua                                    |   |
|                       | Ezra Shashoua                                        |
|                       | Executive Vice President and Chief Financial Officer |

 

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